OUTLOOK CONFERENCE 71 The ‘New World’ Wine Revolution: Redefining market opportunities, competitiveness factors and Australia’s potential ROBERT NICHOLSON International Wine Associates Inc.

s an overseas observer of your industry, I have always jected to receive US$1.5 billion by the year 2000 in the form Abeen deeply impressed by the industry’s commitment to of direct export refunds, product intervention, aid for the use quality and what has been required to achieve that quality. I of must and in acreage reduction programs. However, in the don’t believe any other wine-producing country in the so US the scant government support through the Market called ‘Old’ or ‘New World’ is thinking strategically like this, Promotion Program is currently under attack in Congress. setting their objectives and planning for the substantial cap- The Australian Government needs to understand these issues ital resources required to achieve them. and the support that the Australian wine industry will require In the context of the theme: ‘Can the Australian wine to achieve the industry’s year 2010 objectives. industry meet the export goal with a world surplus of wine and an Australian shortage’, I will briefly review world wine pro- ‘New World’ exporters 1990 duction and exports where the major ‘New World’ players, How did the US, Chile and Australia compare on the inter- Australia, the US and Chile rank in the world. Then I will national market in 1990? (Seeing California accounts for over focus attention on Chile and California as producers and as 95% of US wine exports, when we talk about US exports we export competitors to Australia. Each for their own different are referring to California wine exports.) reasons will be major competition as you work towards your In value California exported 150% more than Chile and 43% export goal. more than Australia in 1990. California also led the way with So, what is all this talk about the ‘New World’ wine revo- volume, with almost three times as much wine sold as lution? We are referring to a very fundamental shift that had Australia and more than twice as much as Chile. However, on started in the early/middle 1980s where wine consumption a per litre basis, Australia was establishing a better image by trends in key world markets began to move away from region- exporting better quality wine at a higher price—over US$2 a al wines (that are produced in what we call the ‘Old World’ and litre—while Chile was gaining a reputation with a lower price are difficult for consumers to understand) to varietal wines (that image that they have since exploited so successfully in major are produced in the ‘New World’ and have been easier to world wine markets. understand). By 1994 the situation had changed dramatically. Australia In large part this shift has come about because of technical leads the way in value, now 50% ahead of California and developments that have produced more approachable, con- 100% ahead of Chile, with a gain of over 200% since 1990 and sumer-friendly wines than many of the ‘Old World’ regional almost US$300 million in export sales. The Chilean revenues wines. Often these innovations originated in Australia or increased by almost 200% to over US$100 million, with a per other parts of the ‘New World’ but they are now impacting on litre price not much below California. Chilean volume is the way ‘Old World’ wines taste. almost level with Australia and both have increased substan- tially since 1990, while the US has grown only marginally. World wine production Australia is much more reliant on its major market, the The European Union producers, predominantly France, Italy UK, when compared to the importance of the largest market and Spain account for 62% of world wine production, while for both California and for Chile. Interestingly, California the US is only 6%, Australia 2% and Chile 1%. sells to their largest market at a lower price than Chile sells to Although world wine production has dropped from its peak their largest market. in recent years, consumption has declined by 20% and the world surplus still averages about 5.5 billion litres per year and USA 1994 major markets is growing as a percentage of total production. Consumption Between 1990 and 1994 California exports only increased has fallen sharply in most major wine-producing countries from 100 to 130 million litres. In 1994 export revenues to their over the past three decades. five major markets accounted for 67% of the value and 63% Of the total wine produced in the world, only 18% is of the volume. Canada grew by 11%, the UK continues to be exported. The EU countries lead the way with France and Italy important from a small, growing base and Asia grew by 19%. equal, accounting for about 50% of the total. The US has Interestingly, table wine exports increased by 14% in volume grown to 3% and Chile and Australia are equal with a 2% share for the first six months of 1995 with the UK running ahead into of world exports. Because of the small share the ‘New World’ first place at 1.7 million cases, up 54% over 1994. producers have, less than 10%, it may be that Australia’s real The challenge for California will be to keep the commitment competition is not in fact other ’New World’ competitors but to the export market during the current period of strong rather France, Italy and Spain. But this issue will need to be domestic market growth and wine shortages. For Californian addressed at a later date in detail. exports to achieve their potential in the next five years the Some of Australia’s competitors receive billions of dollars in international market needs assurance from producers that support from their governments. Even under the new provisions they are serious this time about building a viable export busi- of GATT, which will reduce subsidies, EU producers are pro- ness. With a total domestic wine market of almost 200 million cases annually there has been a history of start and stop in All cases quoted are in standard nine litres. Dollar figures are US Californian wine exports based on how the US market was per- dollars. Plantings are in hectares. Statistical resources are OIV and forming. the individual wine industry institutions in each country. In 1994 total US federal government support to wine

WINE INDUSTRY JOURNAL ■ VOL 11 No 1 FEBRUARY 1996 72 OUTLOOK CONFERENCE exports was US$8.5 million. Since 1986, wine exports have Chile over 200 years ago and peaked in the 1930s when con- increased over five-fold and the percentage of funding to sumption reached 80 litres per capita. The Chilean wine exports has fallen from 12% to 3% in 1994. industry then slipped into decline due to a shift away from wine to other beverages. Chilean export markets Consumption is still declining, now at 30 litres per capita, Between 1990 and 1994 Chilean exports increased from 43 to and with a current population of 13 million, the domestic mar- 108 million litres. To fully understand this growth Chile only ket is limited to consumption of lower quality table wine, exported 16 million litres of wine in 1985. Last year exports generally sold in 1 litre Tetra bricks. There is a small growing were made up of 7.5 million cases of bottled wine, 38 million domestic market for ‘export’ quality wines, as they are called, litres of bulk and 244 thousand cases of sparkling wine. In terms but Chile cannot rely on domestic market growth to absorb sub- of value, wine exports have increased from US$11 million to stantial quantities of varietal wines. Although the country US$142 million since 1985. Last year the average per litre price has had a turbulent political history, a democratically elected dropped to US$1.33. The US market continues to represent government has been in power since 1989 and they are not 20% of volume as Chile effectively positions itself in the fast likely to want to change this current stability. growing, lower-priced fighting varietal market. The UK mar- Chile is blessed with a Mediterranean climate ideal for wine ket is set to grow quickly from the current small base as qual- grapegrowing, with considerable diversity in site and climate ity improves and Chile begins to fill the vacuum created by that is only just beginning to be understood now. increased prices from other producing countries and hit the key There is virtually unlimited land available at low cost for £3.99 price point. vineyard development. It has an abundant supply of water from Generally, Chile’s strength has been in producing good the Andes snow melt, plentiful cheap labour, no mildew or tasting, inexpensive wines from the four classic varieties and phylloxera, rapid improvements in viti- and vinicultural tech- in part this explained why they have been able to restrict the niques, a looming excess of the classic varieties due to recent importance of their top five export markets to only 55% of plantings with a limited domestic market and a buoyant value and volume. financial community willing to support industry develop- In the last two years Chilean quality has jumped dramatically ment. and will continue to improve in the next ten years and Also, Chile is currently negotiating to join Canada, the increase pressure in key export markets. While government USA and Mexico in NAFTA. Much to the concern of export promotional budgets are not yet significant and the Californian producers this could result in a reduction of US official export office, ProChile, usually manages any activity, duties for Chilean wine and will open the potentially large the government actively supports production of value-added Mexican market. export products and encourages rural development. The start- Perhaps most fundamental to their strength and potential up of a new Chilean Wine Bureau in the UK indicates a challenge to Australia in wine exports is the high level of US- change in the previously modest efforts to promote wine educated management expertise available in Chile which has exports. built their economy and other agribusiness exports; for exam- ple in the fresh fruit industry Chile is world leader with over Australian 1994 export markets 10% of the international market and annual revenues Between 1990 and 1994 Australian exports increased from 37 approaching US$1 billion. And interestingly, the current to 114 million litres. With 1994 export revenues growing by head of OIV is Alejandro Hernandez, former Professor of 6%, volume down 13% and pressure on supply, Australia is Santiago’s Catholic University Enology School and a local win- entering a new era in wine exports. The short term priority is ery owner. no longer bulk to Sweden and New Zealand, but to defend existing shelf space, in the UK particularly, against other Chilean wine industry weaknesses challengers while new plantings come into production in the The basis for the growth of Chilean exports since 1985 has been next few years, when Australia will be prepared to fuel export sales of inexpensive varietal wines. In the US these wines growth. Carefully select the markets where you increase prices have presented a real challenge to California fighting varietals during this period of transition and carefully select the markets at lower price points. There is a risk that despite recent where you hold prices. In some markets, such as the UK, once quality improvements Chile may be locked into their bar- it has gone shelf space will cost twice as much to buy back, and gain price image for the next few years. Although, they are Australia will need it in a few years when its new plantings quickly developing entries in the sub-premium categories and come on stream. Also, with over 80% of revenue and volume the image of Chilean wine will improve with time. Most new selling to Australia’s top five markets, there are other major plantings are limited to the four classic varieties— Cabernet opportunity markets to develop—Germany, the Netherlands, Sauvignon, Chardonnay, Sauvignon Blanc and Merlot and the Far East and the USA, to name a few. they have no variety that they can call their own, like Australia can Shiraz, or South Africa Pinotage or California Chilean wine industry strengths Zinfandel. Although the infrastructure is being developed In evaluating the relative competitiveness factors, Australia and much is being done to improve it through importing the may want to look at developments in Chile. Having recently expertise, the wine industry still lacks the necessary depth of returned from my seventh visit to Chile since August 1993, I experience. continue to be amazed at the pace with which the Chileans are Chile has only 30 wineries, of which four (Concha y Toro, adapting their wine industry and building their international Santa Rita, Santa Carolina and San Pedro) control over 80% market. Everywhere I go I see new vineyard plantings, con- of the domestic and export business. Mechanisation is arriv- version to new trellis systems, new winery buildings and ing quickly but low labour costs (US$1 to US$2 an hour) may upgrading of existing facilities and equipment. All this activ- socially slow its acceptance. The historically famous Cabernet ity has resulted in dramatic improvement in the quality of wines vineyards in Maipo are already in the southern suburbs of from the 1994 and 1995 harvests, most of which is still not on Santiago, a fast growing city of 5 million, and in the future may the market. By way of background, wine production started in be absorbed by urban growth.

FEBRUARY 1996 WINE INDUSTRY JOURNAL ■ VOL 11 No 1

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WINE INDUSTRY JOURNAL ■ VOL 11 No 1 FEBRUARY 1996 74 OUTLOOK CONFERENCE

Concha y Toro limitations on water availability for future agribusiness Because of Chile’s mandatory pension scheme, whereby all development is a serious threat to all Californian agriculture, employees have to contribute to their retirement plan, the vineyards particularly. The current replanting costs of phyl- pent-up demand of the Chilean investment community has loxera are estimated to be over US$1 billion. And although resulted in many local companies being over-valued. Based on taxes are currently low and they are certain to increase in the their performance in the six months to June 1995 Concha y future, government regulations are increasing costs in the Toro, Chile’s largest winery and one of the country’s four industry in various ways. publicly traded wine companies, had an estimated market value of US$238 m and a price earnings multiple of 46.5. California plantings 1994 Since 1993 the buoyancy of Chile’s stock market has served Total wine grape plantings are 138,000 ha in California. The to keep international investment focus on Chile with a series growth in the last ten years has been in Chardonnay and of international offerings of Chilean companies. American Cabernet Sauvignon, and recently to a lesser extent Merlot. Depository Receipt Listings (ADRs) are an investment vehicle In 1994, the total crush of wine grapes was 2.2 million tonnes, that allows overseas public companies to trade in the US and down 5% from the 1993 tonnage. The latest crop estimate for investors to buy overseas stock. 1995 was revised down to 2.2 million tonnes, flat with the 1994 In October, 1994 Concha y Toro went to Wall Street with harvest. With continued double digit growth for varietals in a US$53 million Initial Public Offering and 63% was sold to the US and future shortages of grape supply, a major oppor- US investors, most of them institutional. The stock opened at tunity exists for Australia and other overseas varietal produc- US$19.25 a share and currently trades at US$17.25. The ers to fill this vacuum at all price points. Bulk prices for company plans to use the money to pay down debt, fund California appellation Cabernet Sauvignon start at US$1.70 vineyard acquisitions and cover operational costs. A few eye- per litre with Chardonnay a little higher. Because of demand brows were raised in California by a Chilean winery so effec- Merlot is unavailable on the bulk market today. tively tapping into the US equity market! Californian Cabernet Sauvignon Chilean plantings 1994 Total tonnage of Californian Cabernet Sauvignon crushed has Chile has 53,000 ha of winegrapes. Of these 26,000 ha are increased from 65,000 in 1984 to 172,000 tonnes in 1994. planted to the classic varieties. With current exports at just over Grower returns moved from US$550 to US$825 per tonne over 100 million litres and a declining export market, production the same period. New bearing acreage has increased only by 3% of the classic varieties alone will shortly approach double the in 1995 and the current Cabernet crop is projected to be 1994 export sales. Chile will continue to have a plentiful sup- between 160,000 and 190,000 tonnes for a small 3% increase ply of classic varieties at low costs to continue to develop over 1994. Some industry projections are for a shortfall in the their world market at competitive prices as their quality con- California appellation Cabernet of up to 5,000 tonnes by tinues to improve. Current bulk prices FOB Chile are 1997 and closer to 15,000 tonnes in the regional appellations between 75 and 85 cents (US) per litre for Chardonnay, (i.e. Napa, Sonoma, etc.). Cabernet and Merlot and 45 cents (US) for Sauvignon Blanc. Californian Chardonnay California wine industry strengths Total Californian Chardonnay tonnage crushed increased To change the focus to California and the competitive threat from 70,000 in 1984 to 306,000 tonnes in 1994. Grower that it represents to Australia internationally, let us look at its returns decreased from US$1,000 to US$825 per tonne over relative strengths and weaknesses. Some of the strengths are the same period. In 1995 new bearing acreage increased 6% and that large areas of land are still available at costs that may be the crop is projected at between 300,000 and 350,000 tonnes. higher than Australia’s or Chile’s, but are still lower than Industry estimates are that the Chardonnay shortage for the Europe’s. Weather conditions are good, with considerable California appellation may be up to 30,000 tonnes by 1997 and diversity of location and climate. Significant resources are larger in the regional appellations. committed to research at various institutions and the industry has a highly developed infrastructure. Californian Merlot Mechanisation is rapidly being incorporated throughout Total Californian Merlot tonnage crushed increased from the industry and is supplemented with plentiful, experienced 8,000 in 1984 up to 54,000 tonnes last year. Grower returns and inexpensive labour resources. There is considerable increased from US$600 to US$1,100 per tonne over the same varietal diversity throughout California. The blending of period. In 1995 bearing acreage increased by 20% and the crop regional wines to produce better quality, lower priced wines for is projected at between 58,000 and 73,000 tonnes. the mid-priced market opportunity is only now being under- stood. The wine and grape industry is of strategic importance Australian wine industry strengths to the state. Generally, federal and state taxes are low: federal Let’s look at the relative industry and export strengths and excise tax is US$2.54 per case and state taxes vary from a low weaknesses of Australia compared to California and Chile. of 50 cents a case (California) to a high of US$6 (Florida). Australia has political and economic stability. Australia still has lower cost land available, relative to California and parts California wine industry weaknesses of Europe. Australian industry infrastructure is highly devel- The major weaknesses of California as an exporter is the huge oped and has some strong research institutions to support and growing domestic market that currently absorbs all pro- technical developments. duction and takes away from the strategic significance of Most would agree that Australia has a proven leadership posi- developing an international market for most companies. tion in many aspects of world viti- and vinicultural develop- Exporters have to believe that it is going to grow into a mean- ments, hence the host of Australian flying winemakers and ingful business long term because with today’s grape shortage technicians now working in most wine-producing countries of most of California export volume is sold at a break-even based the world. Australia has a broad selection of varieties to on the competitive international environment. The potential satisfy all demands and something nearly unique, the Shiraz

FEBRUARY 1996 WINE INDUSTRY JOURNAL ■ VOL 11 No 1 OUTLOOK CONFERENCE 75 grape, that produces a style unique to Australia. sents some 55, 000 to 60,000 more tonnes of California grapes Australia pioneered the concept of regional blending to used. produce better quality wines very effectively and you should not Total table wine, the tax classification for still wine 14% or be drawn into limiting yourselves by reverting to regional under, increased in 1994 to 157 million cases. Imports grew to appellations to satisfy overseas buyers. You have new areas that 25 million cases with Australia up 13% to 1.4 million cases, and can be drawn on for this in the future. With your export suc- Chile up to 24% to 2.2 million cases. cess Australia has very effectively developed entries into all Domestic table wine increased 5% to 133 million cases. price categories of the international wine market, from Varietals from all sources are driving the market and many Jacob’s Creek to Grange and all categories in between, and is major California wineries posted double-digit gains in 1994 and recognised as a leader in world class wine production. this is where the real opportunity exists for Australia.

Australian wine industry weaknesses Value of USA wine imports, 1985–1994 Some Australian limitations are similar to California’s: water, When we look at the FIS value of US wine imports by major for one, and this will become a political issue, to prove the eco- producing country, Australia ranks second after France with nomic viability of grapes over other crops. Australia’s relatively a value of US$4.02 per litre. This indicates a solid premium high labour costs place pressure on margins, but on the positioning in the US market when compared to Chile or positive side this has forced the industry to mechanise more Italy, which places Australia well for further growth in the rapidly than others in the world. A similar problem to premium US wine market. California is the current shortage of winegrapes; that will be relieved in both cases in the next three to four years. California table wine shipments Government support has been an issue, as it has in the US, and When evaluating the potential for Australian wines in the US, their support must be developed if the year 2010 goals are to it is important to understand the market and grape supply be achieved. Phylloxera may prove to be a costly problem for trends of the California wine industry and that 80% of all wine the industry. sold in the US is from California. In 1994 total California table Concentration of Australia’s exports in only a few markets wine shipments increased to a record 117 million cases. will prove a weakness long-term and it is important to build Shipments of premium varietals, US$3 and above (750 mL bot- new wine markets during the early stages of development. tle at retail), increased by 7% to 48 million cases. Since the early 1980s varietal sales growth has continued at an annual Australian plantings 1994/95 compound growth rate of 15%. Last year even California jug Australia’s current plantings total 42,000 ha, 20% less than wines (all sizes above the standard 750 mL bottle) increased Chile, one third of California’s plantings. However, Australia to 69 million cases, with reds increasing 10% while whites has 35,000 ha planted to the classic varieties (Chardonnay, stopped their ten year decline. Volume increase for jug wines Cabernet, Shiraz, Merlot, Semillon, etc.) whereas Chile has is due to the dramatic growth of the 5 litre cask size. For only 25,000. I understand that the year 2010 goal projects total example, supermarket sales of White Grenache increased by Australian plantings to grow by 3,000 ha per year to over 54% last year in this new package. The surge of the cask 78,000. package has put pressure on margins but may be the beginning of expanding the wine consuming base as happened in the US beverage consumption, 1994 Australian market twenty years ago. I would now like to look at the US wine market. To put US wine consumption into perspective with other beverages con- California table wine revenues, 1980–1994 sumed, the wine industry has some competition in what I In 1994 winery revenues for all California table wines exceed- call the ‘share of tummy’. ed US$2.6 billion. Since 1987 premium wine revenues have 1994 beverage consumption, litres per capita, consists of wine exceeded jug wines and last year increased to 67% of total. at around 6.8 litres, beer at 3, coffee, tea, milk and soft drinks Shipments of premium California wine increased by 5 mil- at a whopping 180 litres per year. It is interesting to note lion cases to a total volume of 48 million cases in 1994. that US consumers have their preference in the chiller box. Looking at how the California premium market is segmented Most of these beverages are consumed chilled, with the by retail price, the popular premium sub-category grew to 35 exception of coffee and red wines. Most of the tea is iced. million cases, the super premiums to 10 million and the ultras to 3 million. Premium California table wines represented one USA wine trends third of all US table wines. Varietals are now part of main- Consumption of wine turned the corner in 1994, increasing 2% stream wine consumption in the US and this indicates a to 193 million cases, making the US the fifth largest wine mar- major opportunity for growth in the future for suppliers from ket in the world after France, Italy, Spain and Germany. all countries, including Australia. National per capita consumption still remains very low, but with a population of 260 million the potential is enormous. California varietal shipments 1994 Total domestic wine shipments increased to 163 million cases In 1994 Chardonnay continued to be the favourite wine of US and excluding coolers grew by 3%. Imports increased to 30 mil- consumers, increasing 20% to 18 million cases and represen- lion cases, their highest level since 1989. The wine cooler cat- ting 38% of all premium California varietal sales. Cabernet egory declined at double-digit rates in 1994, down 27%, just Sauvignon shipments increased by 16% to 9 million cases. as it did in 1993. Champagne and sparkling wine consumption Merlot is still on fire, increasing over 40% to 3 million cases continued to decline in 1994, dropping to 13 million cases, sold. while import sparklers increased to 4 million cases. Dessert and Red Zinfandel and Pinot Noir also turned in impressive fortified wines dropped last year to 11 million cases. Shipments performances, growing by 23% and 40% respectively in 1994. of all types of California wine increased to 151 million cases, As is the case with Californian grape supply for Chardonnay, an increase of 4 million cases over the previous year to 80% of Cabernet Sauvignon and Merlot, in the short term sales pro- total wine consumed in the United States. This alone repre- jections will exceed increases in production and shortages

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Australia’s potential year 2010 I believe that Australia can achieve the potential outlined in Innerstave the WFA strategy, effectively put into place over the last 15 years, by fundamentally continuing as an efficient low-cost pro- ducer of better quality wines than its competitors. Australia has repeat film from 96 WID, which the climate and the soils, the technical skills and the industry includes a patch to address at bottom infrastructure. Australia does need the ongoing support of the Government to assist in making the industry an attractive and viable, long-term investment for overseas sources of cap- ital to develop the industry. ad is slightly non-standard—strip to this Australia already produces a full range of products, from box standard to premium to ultra premium, broader in quality and image than its major competitors. Australia is still relatively competitive on cost and it is critically important that cost remains in balance. However, there will always be lower cost producers than Australia arriving on the scene; Australia must expect these to capture an increasing share at the lower price points, but as Australia develops its business at higher prices it can always dip to lower price points if inventories dic- tate that it must. And, yes, there may be a host of Australian winemakers showing Europeans and others in obscure parts of the world how to correct generations of inflexibility in how wine is made, and, yes, they are beginning to produce wines in the so- called ‘Australian’ or ‘New World’ style with upfront fruit, but don’t forget that none of them will ever make a drop of Aus- tralian wine, and that is what branding Australia as a quality wine producer is all about and that is what Australia has to sell most aggressively. And finally, none of your competitors in the world has yet done this much homework and planned this far ahead. Australia’s planning alone sends a very strong message to those in the world financial community from whom support is needed to develop the wine industry, and it says a lot about Australia’s current infrastructure and strength. Remain Australian. That’s what the wine world loves it for being and, after all, is the reason why Australia’s wines taste the way they do. Never be complacent, stay ahead of the technical curve, refine and redefine the formulas and I believe that Australia can achieve it’s year 2010 objectives. But for those of you who have not yet done so, please, take a look at what is happening in Chile! You’ll find it interesting and perhaps less threatening after a visit. ❏

WINE INDUSTRY JOURNAL ■ VOL 11 No 1 FEBRUARY 1996